Aliado: Dentons – Cardenas & Cardenas
Last August 8th, the Minister of Finance, José Antonio Ocampo, filed before Congress the Bill No. 118 of 2022, by means of which it is intended to implement a new tax reform for year 2023 destined to raise funds to implement President Gustavo Petro’s government plan.
Given that the aforementioned bill must comply with certain formal requirements to become a law, including debates in both the House of Representatives and the Senate, it is most probable that the bill undergoes modifications during its discussions.
With the proposed tax reform, the government expects to collect $25.9 billion pesos in 2023 (around 5.4 billion dollars), around 1.78% of the country’s GDP.
The main reforms proposed by the tax bill are:
1. Individuals
The proposed bill amends the income tax system for individuals.
First, it proposes to end to the current schedular tax system by modifying the net taxable income, which must be determined by adding the net income from labor i, capital income, non-labor income, pension , dividends, stake, and capital gains.
The Government is yet to define whether there will be separate schedular taxes for dividends and capital gains as it also proposes to modify the procedure to establish the net income on general schedule (by including all incomes except the ones derived from dividends, stake and capital gains).
In addition to the aforementioned, the following modifications are proposed:
a. Labor Payments
Under the current system, individuals may detract from their salary, , 25% of labor payments as tax exemption, up to a maximum limit of 2,880 tax value units (“UVT”) (approx. COP$110,000,000).
With the current government proposal, the maximum limit to be detracted as exemption would be reduced to a value of 790 UVT (approx. COP$30,000,000).
In the case of individuals receiving other types of income such as fees or compensation, , the bill enables the Colombian tax authority (“DIAN”) to determine a series of caps for deductible costs and expenses. It is estimated that the deductible costs and expenses for labor income will have a cap equivalent to 60% of the gross income, and in the event that the taxpayers exceed these indicative maximums, they will have to report that situation in its income tax return.
Nevertheless, the applicable rates for this type of payments will continue to be progressive, keeping the current rates (within a range of 19% up to 39%).
b. Pensions
Pensions are currently exempt up to an amount of 12,000 UVT per year (approx. COP$456,000,000).
With the current government proposal, the exemption would be reduced to 1,790 UVT per year (approx. COP$68,000,000), meaning that any pension exceeding such amount would be taxed as ordinary income and subject to the progressive income tax rates applicable to individuals.
c. Exempt Income
The current exempt income regime provides that individuals who calculate their income tax under the schedular tax system are allowed an exempt income and other deductions up to 40% of their net income, with a maximum limit of up to 5,040 UVT per year (approx. COP$192,000,000).
The tax reform does not modify the 40% limit , but it does reduce the maximum limit of deductible net income to a total of 1,210 UVT per year (approx. COP$46,000,000).
d. Dividends
Currently, dividends received by residents are subject to a 10% tax calculated over total dividends that exceed 300 UVT (approx. COP$11,400,000).
The tax reform proposes to eliminate the special rate for dividends established in Art. 242 of the Tax Code, and proposes to tax dividends at the same tax rate applicable to individuals (between 19% and 39%).
The tax reform bill also proposes that dividends received by foreign legal entities and non-resident individuals to be subject to a tax rate of 20%, 10% more than the current rate of (10%).
2. Legal Entities
The income tax rate for legal entities is not modified remaining at 35%. With respect to financial entities, the 3% surtax on the income tax rate for financial activities is kept.
Additionally, the following modifications are proposed:
a. ICA
Current regulation establishes that ICA tax can be either taken as an income tax deduction or as a tax credit equivalent to 50% of the paid amount.
The reform proposes to eliminate the possibility of taking the ICA as a credit stating that it could only be used as 100% deductible from income tax.
b. Free Trade Zone Users
Legal entities considered free trade zone users will maintain the 20% income tax rate, as long as they certify an approved internationalization plan , with a minimum export threshold yet to be established by the government. This to be certified every year by January 1st.
The current regulation does not require the internationalization plans to be approved nor does it empower the government to set minimum export thresholds, which means the proposed bill increases formal obligations for the taxpayers in order for them to access the special tariff for free zone users.
In the case of sole owned companies free trade zone users, the applicable rate will be the general rate of 35%.
c. Limit on Tax Benefits
The reform contemplates that the value of income not considered as taxable income, special deductions, exempt income and tax discounts, can in no case exceed 3% per year of the taxpayer’s ordinary net income, before including such in the calculation.
The reform contains a provision prohibiting the deductibility of royalties for income tax purposes, stating that they cannot be treated as a cost or expense to the extent they are considered as a payment under a contractual obligation for the use of the subsoil granted by the State.
3. Capital Gains Tax
For capital gains tax, individuals and legal entities are currently subject to a 10% rate, except for lotteries and bets which are taxed at a rate of 20%.
The reform proposes that capital gains be subject to a differentiated tax regime according to the taxpayer receiving such gains.
Some of the rates mentioned include:
- Tax Residents: The bill proposes to modify the taxable net income, adding to the existing schedular tax the capital gains income. Therefore, it is established that capital gains be taxed at the income tax rates for resident individuals referred to in Art. 241 of the Tax Code. Rates ranging between 19% and 39%.
- Non-Tax Resident Foreign Individuals: Taxed at a rate of 30%.
- Domestic and Foreign Corporations and Entities: Taxed at a rate of 30%.The reform also modifies the exempt amounts of certain transactions subject to capital gains tax, namely:
- Real estate property owned by the taxpayer: 13,000 UVT exempted (approx. COP$494,000,000) increasing from the current exemption of 7,700 UVT
- Real estate other than the home owned by the taxpayer: 6,500 UVT (approx. COP$247,000,000), decreasing from 7,700 UVT.
- Profit on the sale of the house or apartment: 3,000 UVT (approx. COP$114,000,000) decreasing from 7,500 UVT.
- Portion of the inheritance received by the heirs or legatees: 3,250 UVT (approx. COP$124,000,000) decreasing from 3,490 UVT.
- Life insurance indemnities: 3,250 UVT (approx. COP$124,000,000) decreasing from 12,500 UVT (approx. COP$475,000,000).
4. Wealth Tax
The tax reform reinstated the previously eliminated wealth tax, which is intended to be permanent and payable annually.
Those liable for such tax would be tax residents and non-tax resident individuals, inheritances, and foreign companies or entities that are not income tax responsible in the country or own assets located in Colombia other than shares, accounts receivable and/or portfolio investments.
Such tax would be generated with respect to those who have a net worth that is equal or higher than 72,000 UVT on January 1 of each year, that is, a net worth whose value is equal or higher than COP$2,736,288,000 for the year 2022. For the calculation of the taxable base, net equity is taken into account. (Gross equity minus debt).
The regulation that modifies the taxable base contains an exemption for individuals for wealth tax purposes for a value of 12,000 UVT (approx. COP$456,000,000), corresponding to the equity value of their home.
Regarding the tax rate, article 23 of the bill provides:
- Equity from 0 to 72,000 UVT: Non-taxable.
- Equity from 72,000 to 122,000 UVT (approx. COP$4,600,000,000): Taxed at a rate of 0.5%.
- Equity from 122,000 and up: Taxed at a rate of 1%.
5. Simplified Income Tax Regime
Another significant change incorporated in this bill is related with the reduction of some categories for the rates applicable to the simplified tax regime, and the inclusion of one additional activities.
Some rate reductions are:
- Wholesale and retail commercial activities, technical and mechanical services on which the material factor predominates over the intellectual one: For annual gross income between 30,000 UVT and 100,000 UVT, the reduction is changed from 5.4% to 5%.
- Professional services in which the intellectual factor prevails: For annual gross income of 15,000 UVT to 30,000 UVT, it is reduced from 12% to 7.8%. For gross income from 30,000 UVT to 100,000 UVT it is reduced from 14.5% to 8.3%.
- Food and beverage sales and transportation activities: For income from 15,000 UVT to 30,000 UVT a reduction from 5.5% to 4.4% and reduction from 7% to 5%.
- In addition, education, health care and social assistance activities are included with rates between 4.1% and 6.5%.
6. New Taxes
The reform creates a series of new taxes, such as health and environment taxes, as follows:
a. Tax on sugar-sweetened beverages
A tax is proposed on carbonated beverages and soft drinks, with a rate based on the sugar content in grams per 100 milliliters of beverage.
Such tax shall be borne by the producer, the importer or the economic related party for the product.
b. Tax on ultra-processed foods
A tax is proposed on the production and consequent first sale or import of industrially processed food products with high added sugar content, including sausages, candies, snacks and sugary powders for preparations.
The taxable base of the tax would be the sale price at a tax rate of 10%. Such tax shall be borne by the producer, the importer or the economic related party for the product.
c. Tax on single-use plastics
A one-time tax on the sale and import of plastic products used to wrap or pack goods is proposed.
The tax is generated by the product withdrawal for personal consumption or import for personal consumption of single-use plastic products used to wrap or pack goods at the time of sale by the producer or product withdrawal for consumption by the producer.
The taxable base will be calculated based on the weight in grams of the plastic container or packaging with a rate of 0.00005 UVT (approx. COP$1.90) for each gram of container or packaging.
d. Carbon-emission tax
Finally, a carbon-emission tax is proposed for the carbon content of all fossil fuels, including petroleum derivatives.
This tax is generated by the sale within thenational territory, product withdrawal for personal consumption, import for personal consumption or import for the sale of fossil fuels.
The tax rate will be determined by the greenhouse gas emission factor of each fuel.
e. Tax on the export of crude oil, coal and gold
The bill also creates an additional tax on crude oil, coal and gold exports, the taxable base to be calculated based on a certain percentage of the total Free on Board (FOB) dollar value of crude oil, coal and gold exports on a monthly basis.
Such tax triggered by the sole exportation of the aforementioned natural resources, with a 10% rate, which shall be declared and paid on a monthly basis, within the first five (5) working days of each month.
7. Mechanisms to combat tax evasion and tax elusion
The Reform includes several mechanisms in order to fight against evasion and tax elusion, among which we highlight the following:
- The concept of significant economic presence would be included, which includes non-residents when they have a deliberate and systematic interaction with users or clients in Colombia, taking into account a certain amount of gross income, the use a Colombian website and the number of users.
- The income in kind is subject to review.
- It is proposed that the GMF withholding agent institutions adopt a control system to verify and control its collection and the 350 UVT exemption.
8. Abolition
The final article of the reform bill establishes the abolition of several provisions, with the understanding that the tax benefits granted prior to the abolition of these rules are considered acquired rights in favor of taxpayers.
The following is a list of the main tax benefits that the bill intends to abolish , among which we highlight the following:
- Some paragraphs of article 36-1 of the Tax Code referring to the profit from the sale of shares and the profit from the negotiation of derivatives considered securities and whose underlying assets are shares registered in the stock exchange.
- The provision that provides for capitalizations of the Equity Revaluation account that are not taxed for partners or shareholders would be eliminated.
- Some tax benefits would also be eliminated, such as:
- Tax exemption for the Nevado del Ruiz area.
- Income that does not constitute income or capital gains from subsidies under Agro Ingreso Seguro.
- Deduction of contributions to mutual investment funds and retirement and disability pension funds.
- Exempt hotel income, mega investments and those associated with the orange economy.
- Pandemic-related donation tax credit for COVID-19.
- Benefits for donation or investment in film production.
- Exempt income tax incentive for orange economy companies.
- Exempt income tax incentive for the development of the Colombian countryside.
- Exempt income tax incentive for social interest housing (“VIS”) and priority interest housing (“VIP”), except for financial yields from the acquisition of VIS/VIP loans.
- Exempt income tax incentive for the harvesting of new forest plantations (including Guadua).
- Tax incentive of exempted income for river transportation services with shallow draft vessels and flatboats, for a term of fifteen years.
- Tax incentive of exempt income for the literary creations of the orange economy referred to in Article 28 of Law 98 of 1993.
- Special income rate for mega-investments within the national territory.
- Tax stability contracts for mega investments developed in the national territory.
- Tax discount for donations aimed at achieving the immunization of the Colombian population against COVID-19.
- Income from peace solidarity bonds is income considered nontaxable income nor capital gains.
- Special rate for capital gains from lotteries, raffles, bets and similar.
- Income tax exemption on royalty income received by Colombian and/or foreign authors and translators residing in Colombia, for books of a scientific or cultural nature published and printed in Colombia for each title each year.
- Creation of the Special Economic Zone – (ZESE in Spanish) for Guajira, Norte de Santander and Arauca.
- Treatment of discounts, debts, fines, penalties and interest obtained by taxable debtors as capital gains and not as ordinary income, within the framework of reorganization agreements under the regime of Law 1116 of 2006.
- Special income rate for international maritime transportation services, carried out through vessels or naval artifacts registered in the Colombian registry.
- Creation of the Special Economic Zone – (ZESE in Spanish) for the District of Barrancabermeja.
- Special Industrial, Port, Biodiverse and Ecotourism District of Buenaventura in the Special Regime of the Special Economic and Social Zone (ZESE in Spanish).
- Incentives for investments in hydrocarbons and mining and the three-year straight-line amortization for investments in exploration, development and construction of mines and oil and gas fields are eliminated.
- The VAT-free day exemption is eliminated.
